Cyprus: New Transfer Pricing rules and documentation

Definition of a related party

The new law defines the parties as related when:

1. If same person and its related persons hold directly or indirectly the 25% of the voting rights or share capital or are entitled to more than 25% of profits in both companies, then the two companies are related

2. If a person and its related persons hold directly or indirectly the 25% of the voting rights or share capital or are entitled to more than 25% of profits of a company, then the person is related to the company

3. If two or more persons act together to hold directly or indirectly the 25% of the voting rights or share capital or are entitled to more than 25% of profits of a company, then all the persons are related

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Local File

Related parties that engage together in controlled transactions of which the total value is more than €750.000 per annum per Category are required to maintain and keep a Local File.

The relevant categories of controlled transactions are the exchange of goods, services, royalties and intellectual property, financial and other.

The required contents of the Cyprus Local File closely follow the definition and suggested contents as per the OECD TP Guidelines and BEPS Action 13 Report.

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Master File

If the taxpayer is part of a multinational enterprise group, with consolidated revenue above €750 million, with a Country-by-Country Reporting obligation and the taxpayer either the Ultimate Parent Entity or the Surrogate Parent Entity, then the preparation and maintenance of a Master File is required.

The purpose of the master file is to provide a high-level overview in order to place the group’s transfer pricing practices in their global economic, legal, financial and tax context.

As also expected, the required contents of the Master File will closely follow the definition and suggested contents as per the OECD TP Guidelines.

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Summary Information Table

The Summary Information Table (“SIT”) must be submitted by all entities engaging to transaction with their related parties, irrespective of the value of these transactions. The SIT will include in brief the intercompany transactions, general information about the group, the profile of the business and the transfer pricing method used and will be submitted annually together with the income tax return of each entity.

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Penalties

A penalty of €500 is applicable in case of late submission of the SIT.

In case the tax authorities request the submission of a Local and/or Master File the taxpayer is obliged to submit it within 60 days. The following penalties apply for late submission:

·         61 to 90 days: €5.000 penalty

·         91 to 120 days: €10.000 penalty

·         121 days and more: €20.000 penalty

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Advance Pricing Agreement procedure

Finally, the new law also provides specific provisions regarding Advance Pricing Agreements (“APA”) based on the arm’s length principle. The purpose of the APA is the appropriate set of conditions and assumptions used to determine controlled transactions for a specified period.

These criteria shall include the following:

·         The TP documentation method used

·         The critical assumptions on the specified profile of the parties involved

·         The relevant market conditions

·         Comparable and appropriate adjustments

·         Any other matters in relation to the pricing of these transactions

Upon submission of an APA request to the Tax Department, the request shall be accepted or rejected within 10 months. The Tax Commissioner has the right to extend the timeframe up to 24 months and an approved APA request will be valid for period of up to four years.